Western Real Estate Business Article on Sacramento Office Market

This month, June 2010, the magazine Western Real Estate Business has a profile on the Sacramento Market. With our colleagues at Cassidy Turley we contributed to the commercial real estate market review. Here are our particular observations on the office market in Sacramento..

Office

The Sacramento Valley office vacancy rose to 16.3 percent in first quarter 2010, as total availability increased 300,000 square feet for a total of 13.9 million square feet. Sublease space remained constrained, representing less than 3 percent of the total availability. The overall average asking rate for office space slid another $0.03 per square foot quarter over quarter to $1.85 per square foot full service in first quarter 2010.

Gross absorption was a mediocre 1 million square feet in first quarter 2010, about 25 percent less than its quarterly average in the past year and 40 percent below since 2005. Large tenants remain very scarce in the market, with most of the activity being dominated by smaller tenants less than 10,000 square feet. Net absorption, the change in occupied space, was a negative 368,000 square feet in first quarter after having reported positive 117,800 and 213,000 square feet in fourth and third quarters of 2009, respectively. Notably, during the past year, net absorption (which excludes new vacant construction) has actually held stable with just negative 50,000 square feet. The heavy dose of new unoccupied construction has really been a primary cause for the large increase in vacancy and availability in the past year.

The larger leases in first quarter 2010 included California State Board of Equalization for 76,502 square feet in Sacramento; ITT Technical Institute for 27,020 square feet in Rancho Cordova; Principal Financial Group for 24,645 square feet in El Dorado Hills; and Brown & Caldwell for 22,126 square feet in Rancho Cordova. There were also a handful of notable sales, led by CSAC Excess Insurance Authority’s acquisition of a 48,591-square-foot building in Folsom.
Office construction continued to trickle at the start of 2010 as projects funded more than 1 to 2 yearsr ago are now finally being completed. One building was delivered in first quarter: the 141,210-square-foot Sutter Health Facility in east Sacramento. This pace is already drastically cooler than last year when 1.9 million square feet were delivered and caused a massive swelling to the area’s vacancy rate. The development pipeline, however, is quickly diminishing as developers wait on the sidelines until market conditions become favorable. This slowdown is a double-edge sword, as it will help alleviate rising vacancy, but it will also take away construction jobs, a historical key source of job growth for the market.

The climate continues to remain favorable for tenants as there are still a lot of rental rate discounts being offered, plus concessions such as free rent and higher tenant-improvement allowance dollars from landlords. Lease terms also remain shorter, with the typical leases ranging between 1 and 3 years. The office sector will continue to battle the effects of the economic recession. The services and tech sectors lost a reported 10,000 jobs, and the job outlook ahead remains pretty grim. The forecast is that there will continue to be growing vacancy, slightly lower rents and very little new construction. The bright spots in the local office market have been and will likely continue to be owner-user sales financed with SBA long-term, low-interest loans and growth in healthcare and education.

Notably, the heavy majority of the 10 largest office leases transacted in 2009 were from the state’s government. Government is at risk as revenues from property and sales taxes continue to shrink, as the deficits become increasingly structural. Employees are being furloughed. Services are being cut back, and capital expenditures are being frozen. A great deal of the federal stimulus funds found their way to state and local government last year, but who knows what the political future holds? What happens to state and local government will have profound impacts. There is reason to be more optimistic, but being able to avoid a “double dip” is not certain.

— Jim Gray is a partner and Nahz Anvary an associate in Cassidy Turley BT Commercial’s Sacramento office.

Here is a link to the entire article:

http://westernrebusiness.com/articles/JUN10/highlight1.html

Sacramento Market Conditions

This month, June 2010, the magazine Western Real Estate Business has a profile on the Sacramento Market. With our colleagues at Cassidy Turley we contributed to the commercial real estate market review. Here are a few of our observations.

SACRAMENTO

Like most markets around the country, the Great Recession has severely impacted the overall state and morale of the Sacramento area in all facets and in some aspects even more so. Some of the effects have been dramatic job loss, wage losses, soft tenant demand, increased vacancy rates, plummeting rental rates, depressed housing values, rising residential and commercial foreclosures and tightened credit practices to a decline in consumer confidence and spending. Unemployment exceeded 13 percent in March 2010 from the mid-5 percent range pre-recession as a substantial number of jobs, more than 80,000 wage and salary jobs, have reportedly been lost in the area since mid-2007. Commercial real estate vacancies have climbed to new highs as rental rates have plummeted. It was reported in early 2010 that for every six businesses open, one was closed in greater Sacramento; this is a very staggering statistic.
New construction projects, namely office-oriented, that were funded a few years ago during the last market recovery were still being completed through 2009, which continued to add further strain to vacancy rates. Many retailers, from small shops to big box, have been forced to close their doors as a result of the difficult economic climate that has resulted in depressed consumer confidence and a drop in retail sales. Some large and small retail tenants have recently begun to emerge or re-emerge in the marketplace, but there still remains a lot of vacancy to fill.

Additionally, home prices have plummeted from their pre-recession levels, while foreclosures have climbed, with the latest figures showing more than 56,000 foreclosures since the start of 2007 in the Sacramento area. The city’s housing sector has been one of the most negatively impacted statewide although there are signs that it is beginning to right itself. In the commercial sector, a significant amount of foreclosures have been realized and a sizable number more are expected. In recent reports, the Sacramento metro area ranked No. 3 in the nation in terms of bankruptcy filings. However, the problems in the commercial sector are not anticipated to be as significant on the metro economy as the residential market.

— Ken Reiff is a managing partner with Cassidy Turley BT Commercial’s Sacramento office and Jim Gray is a leasing and sales specialist.

Here is a link to the entire article: http://westernrebusiness.com/articles/JUN10/highlight1.html

Investment Sales Slow in USA and in Sacramento

Investment sales slow dramatically…

My current line when people ask me “how is the commercial real estate business?” is “It’s fine but I get to sell properties 4 or 5 times before they actually close”. This is because buyers are pickier, sellers are confronted with a changing market and lenders are tougher when it comes to underwriting real estate loans. The indicators are clear and we feel it as active brokers in the business--Investment sales have slowed down considerably. The National Association of Realtors reports that “Investment in commercial real estate during the first 4 months of 2008 was $48.2 billion, down 69.5% from the $157.8 billion for the same period in 2007. More at http://www.realtor.org/press_room/news_releases/2008/commercial_index_contracts

And here in the Sacramento Region, the Sacramento Business Journal reported “Real Estate investment tumbles; sales happening, but at a slower pace.” The Business Journal reports that investment sales are off 2.1 billion or 58% drop for the past 12 months. More at http://sacramento.bizjournals.com/sacramento/stories/2008/08/04/story5.html

Clearly volume is down, but deals are still getting done. For the first 6 months of 2008 14 office investment properties have been sold and that contrasts to 56 transactions for the same period in 2007.

The slowdown is attributed to the overall decline in the economy, to a tighter credit market with stricter underwriting in which lenders are requiring higher down payments plus higher interest rates and personal guarantees from buyers. A number of lenders have left the market all together. Also a number of prospective buyers are waiting and assessing what is happening to operating expenses, rental rate growth/decline, and to potentially higher cap rates.

We agree that this market is slowing, but we believe it is not going to be like the savings and loan collapse of the late 80’s. There has not been that much over-building , and most properties are still generating positive income and cash flows for the current owners. Sure, there will be some investors who will get into trouble and will need to dispose of properties that were bought at the top—that haven’t hit their proformas and likely have short term debt or adjustable rate debt who will have a higher sense of urgency. Sellers who want or need to sell will need to be realistic about their price and their deals will attract buyers with more cash seeking higher yields – 7% to 8.5% cap rates on actual Net Operating Income – and underwriting and conditions of financing will make transactions harder to get funded and to actually close.

If you would like to discuss this blog post with us or if we can help you with a commercial or investment real estate transaction please call or email us at Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com.

California Green Building Code Enacted...!

Attention developers!! Green—no longer just an ideal but now a reality. California Green Building Code enacted…

We like to think of ourselves as progressive, helping our clients better understand the ins and outs of what it takes to develop buildings for the upcoming century. It is clear that we need to get up to speed with the new building code for California. We will add that to our studies already underway for LEEDS AP. Thank goodness we are believers in lifelong learning.

This past Thursday, the California Building Standards Commission adopted the first statewide “green” building code in the nation, moving all of these “green talk” from just an ideal to a forthcoming reality. The code will be phased in between 2009 to 2011 and encompasses Commercial buildings, health care facilities, and homes. Some impacts include lowering water use, improving air quality, and increasing energy efficiency. Some advice to developers of commercial buildings and homes--use this as the impetus to get familiar with what it takes to re-conceptualize your plans and projects to incorporate these standard and other ideals rather than being forced to change by a new law.

For the reference, go to the California Department of Housing and Community Development’s press release at http://www.hcd.ca.gov/news/release/07182008PressRelease.pdf

Or to the Sac Bee article at http://www.sacbee.com/103/story/1091557.html

To learn more about green, to to the US Green building council web site at: http://www.usgbc.org/

Also view our previous blog article on intelligent buildings at: http://scorebrokers.blogspot.com/2008/06/intelligent-buildings-from-executives.html


If we can help you with strategies to help you prepare for this upcoming change in the building code and the related elements of vision, innovation, collaboration, sustainability, and consideration of utilizing technology and targeted marketing please give us a call. For questions about this post or to discuss please contact Jim Gray or Nahz Anvary at (916) 617-4255 or (916) 617-4257

Lots of Options --Office Buildings For Sale Sacramento

Office Buildings For Sale in the Sacramento Valley—What Does That Really Mean?
Sifting through Lots of Opportunites...

So you are looking for an office building to buy in the Sacramento area? Or you are thinking about investing in a commercial/office property in the Sacramento area? Well you have plenty to choose from – but you need to refine your search if you want to locate what you really want and you want it to meet your business and investment needs. Office properties are known as one of the four core product types of commercial real estate. Office properties vary greatly in their configuration, style, utility, and economic performance. The “office market” is comprised of many distinct property types. These include modern skyscrapers, medical office, office condos, classes A, B& C, single tenant and multi-tenant, offices for the owner user and offices that are well managed investment properties. There is institutional quality and there are mom and pop offices. Sometimes offices are mixed use with residential or with retail, and there are offices in warehouses and within flex buildings. There are various submarkets and plenty of features that differentiate. Being able to understand these variables and their unique attributes requires a professional focus and asking the right questions.

It is the first of the month and Commercial Brokerage Firms are sending out their “availability lists”. When this occurs, it means that the research staff and the administrative staff are working closely with the Brokers to make sure that an inventory of available property is updated and distributed. When this task is performed by the various offices it also means that the information to the commercial databases such as LoopNet or Costar are also updated. But consistent and uniform information it is not! We thought it would be interesting to review the office market and share some of the findings from our analysis of this imperfect market information.

Here is an effort to describe the current inventory of “office properties” that are “actively on the market”. There are 580 office properties currently offered for sale in the Sacramento Valley. They range in price from $135,000 to $26,500,000. Only 12.5% of the office properties have a quoted cap rate—the other 87.5% are being offered to owner users --or the investment attributes haven’t been provided for their office offering.

To help get our arms around the market we did a few searches in LoopNet to check in on market conditions. The searches included the counties of Sacramento, Placer, El Dorado, Yolo, and Solano. We then looked at the information in these offerings and have the following observations to share:

The first search was for “office properties” less than $1 million dollars. There are 209 separate properties on the market. They range from Victorian houses modified for commercial use to small office condo units. Only 11 of those properties reported a cap rate- ranging from 4% to 9.10%. 198 of the offerings are trying to attract the owner user. Sizes ranged from 384 to 9,600 square feet. Prices varied from $135,000 to $999,999 and from $104 all the way up to $962 per square foot.

The second search was amongst office properties from $1 million to $10,000,000. There are 355 office buildings on the market in that price range. In this category there are properties from $1 million to $9,815,000 on the market. Sizes in this price range from 2,435 to 59,616 square feet and prices per square foot range from $94 to $425 per square foot. Of these offerings, only 55 properties quote a cap rate –ranging from 4.12% to 9.08%. Three hundred of these offerings have no stated income and expenses and are not being offered as an investment.

The third search was for office properties being offered for sale at $10,000,000 or more. In this price category, there were 16 properties on the market. From $10,454,000 to $26,500,000 with more than half of these offerings being “un-priced” and only 6 of these have a quoted cap rate –from 6% to 7.6%. Sizes in these high price offerings range from 34,848 to 153,879 square feet.

There is a lot of inventory; more than 500 buildings being offered to users or being offered without stabilized income --but not a lot of office investment inventory on the market. However, it is worth noting that there are now more than 30 office buildings being offered for sale with cap rates higher than 7%.

If we can assist you with your search for an office for your business or an office as an investment please contact us to see if we can be of service and bring professionalism and value as you sift through and consider available options. If you have questions or comments about this post or if we can assist you with your commercial and investment real estate needs please call Jim Gray at (916) 617-4255 or Nahz Anvary at (916) 617-4257.